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This is the Business Roundtable’s last Friday Graph, and it is appropriate to end on an uplifting note on the Business Roundtable’s major themes of the link between increasing prosperity and increased economic freedom – freedom of trade and contract backed by sound laws and regulations and excellence in the provision of public goods, through sound policies and institutions.

Late last month the UK magazine, The Economist, reported here that new World Bank estimates showed that between 2005 and 2008, poverty fell in every region of the world, for the first time ever. This is the chart from that article.

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The Economist‘s article notes that half of the long-term decline in poverty is attributable to China, which has taken 660 million of people out of poverty since the 1980s. The critical role that greater openness to trade and commerce has played in that is obvious to all.

Less well known is the recent decline in poverty in sub-Saharan Africa and its relationship to economic freedom. Continuing gains in economic freedom in this region were highlighted in the Heritage Foundation’s 2012 Index of Economic Freedom. A chapter here in this publication authored by Obiageli Ezekwesili, vice president of the African region at the World Bank reported that a World Bank research report had ” found new empirical evidence supporting the idea that economic freedom and civil and political liberties are at the root of reasons why some countries achieve and sustain better economic outcomes while others do not”.

Stephen Jennings alerted New Zealanders to the exciting developments in Africa in delivering the 2009 Sir Ron Trotter lecture. Overall, he considered that, “the next several decades of accelerated economic convergence will see the fastest growth, most rapid structural change and greatest economic inclusion in history”. He concluded that New Zealand could and should be a global success story if it did two things: (1) embrace change based on enterprise and competition and be willing to acknowledge and celebrate economic and business success, “rather than regarding it as something it is impolite to dwell on”, and (2) move back to a system of government that allows democratically elected leaders to make performance-enhancing changes, “without excessive pandering to narrow sectoral interests”.

New Zealand made great progress in improving prosperity and economic freedom over the past 25 years. It is timely to record Roger Kerr’s leading role in researching, devising, advocating and defending the critical reforms throughout that period as executive director of the Business Roundtable. Among his lasting achievements was his insistence that the result of each reform must be to make enduring improvements to the lives of ordinary New Zealanders. Roger’s published research, thinking and forthright advocacy of sound public policies – in terms of quality, rigour, depth and reach – is unmatched in this country’s history.

But the task of further improving competitiveness, resilience and flexibility remains. That work will be continued by the new merged think tank whose new name and executive director will be announced next week.

This week’s Friday Graph uses Statistics New Zealand’s newly-released estimates for real GDP for the December quarter 2011 to show how weak real GDP growth has been since around 2005.

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Real GDP was 1.4 percent higher in the 2011 calendar year than in 2010 and real GDP per capita was 0.6 percent higher.

This represents a much weaker two-year recovery from the 2009 downturn than after each of the 1991 and 1998 downturns. (Real GDP rose by 5.2 percent in 1993 and by 3.9 percent in 2000.)

Given the debate around the world currently about the effects of budget tightening on economic activity, in looking at this chart it is useful to bear in mind that the strong recovery after 1991 contradicted the expectations of 15 economists at the University of Auckland who wrote a public letter in June 1991 declaring “in the strongest possible terms” that the June 1991 budget cuts were “fatally flawed” and could “only depress the economy further”.

The chart also shows a poor growth performance generally since 2005, compared to the post-1991 period as a whole. This is consistent with the slowdown in productivity growth that was the topic of last week’s Friday graph.

In an article Setting the Sails in late November 2011, Business Roundtable chairman, Roger Partridge observed that the two main economic problems the country faces are structural imbalances and the slump in productivity growth.

Yesterday Statistics New Zealand updated its most accurate estimates of productivity growth for New Zealand to include the year ended March 2011. These estimates exclude the areas of economic activity in which productivity is hardest to measure, which is primarily in the public sector.

The results were very poor being no change in multifactor productivity and a drop of 0.1 percent in labour productivity. (Productivity measures the volume of output per unit of input. Multifactor productivity uses a weighted sum of the volume of labour and capital for the unit of input.)

Productivity is difficult to measure and is cyclical. It is more important to look at the trend as well as at the latest figures. Statistics New Zealand has attempted to address the cyclical problem by identifying start and end points for each cycle between 1978 and 2011. The latest cycle is for the 2006-2011 period.

This week’s Friday Graph plots the annual change in multifactor productivity growth and its average annual growth rate during each cycle, as calculated by Statistics New Zealand.

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The graph shows that the average annual growth rate of minus 0.6 percent during the 2006-2011 cycle was the worst recorded, but it was not aberrant. Instead it followed a markedly poor outcome during the 2000-2006 cycle.

Because the timing of these cycles is inevitably somewhat problematic, it is pertinent to note that there is strong evidence that the productivity performance during the 1990s has been vastly superior to that since 2000.

The key policy features of the 2000-2011 period have been renationalisation, a deluge of intrusive regulation and one of the biggest five-yearly increases in government spending in New Zealand’s history. That increase has been associated with pressure on the exchange rate and a weak traded goods sector performance, despite very favourable prices for exports relative to imports.

The ‘creative destruction’ of competitive processes requires labour and other resources to be continually shifted from contracting areas of the economy to expanding areas. Rigid labour markets impede this process, with government regulations being a common cause of inflexibility.

A March 2012 IMF Working paper here uses statistics on 97 countries between 1980 and 2008 to assess the importance of labour market flexibility. It finds that financial crises initially have a large negative impact on unemployment, but this effect rapidly disappears in the medium term in countries with flexible labour markets. There is less pronounced, but more persistent, unemployment in countries with more rigid labour market institutions. No surprises there.

A second March 2012 IMF Working Paper here by the same authors, also using a panel of 97 countries but this time spanning the period from 1985 to 2008, suggests that improvements in labour market flexibility, particularly in respect of hiring and firing regulations and hiring costs, reduce unemployment, youth unemployment and long-term unemployment.

Given the importance of ease of hiring and firing for flexibility, it is regrettable that New Zealand ranks so poorly in the world (86th) in respect of such practices – according to the latest World Economic Forum’s Global Competitiveness Index 2011-2012 (see the graph below).

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More happily, New Zealand ranks much better for other aspects of labour market flexibility in this index, being 10th in the world overall.

Note that the ranking for hiring and firing is based on surveyed opinion rather than ‘hard’ data.

Last week’s Friday Graph showed how much the public sector had outstripped the private sector in terms of filled jobs in recent years – and seemed to be holding its gains.

This week’s Friday Graph shows that much the same applies in respect of the latest Statistics New Zealand release of estimates of the rises in hourly labour costs.

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The sold blue and purple lines show real hourly earnings for the public and private sectors respectively against the scale on the left hand side of the chart. Expressed in June quarter 2006 dollars using the consumers price index (all groups) the average hourly wage rate in the December quarter 2011 was $29.21 in the public sector compared to $21.18 in the private sector.

The green line shows that the public sector average has risen sharply relative to the private sector average since the mid 1990s, (see the right hand scale). The thick green line is a smoothed version of this curve. (For the technically minded it is a Hodrick Prescott filter).

These graphs complement the 30 September 2011 Friday Graph here that showed that the burgeoning growth in the public sector has been associated with a squeeze on the competitiveness of the traded goods sector.

The Key government’s key economic decision in the term of the last parliament was arguably the decision to slow the growth in public spending rather than to roll the excesses back to a material degree.

Today’s graph is produced courtesy of British journalist and author James Bartholomew, from his award-winning, influential book The Welfare State We’re In.

Marshalling a vast array of evidence, the book examines the British welfare state, its well-intentioned origins and its unintended impacts on the character and quality of British life. In the author’s view:

The [British] welfare state has caused tens of thousands of people to live deprived and even depraved lives, and has undermined the very decency and kindness which first inspired it.

The chart depicts his view of the damage done to British society, highlighting how effects – such as incivility and the rise in crime – arise from a combination of causes and secondary causes:

Lone parenting, low-quality compulsory education, living on benefits, council estates and the widespread reduction of the sense that each of us must take responsibility for ourselves and our families, all of these – caused by the welfare state – have contributed to it.

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The Welfare State We’re In, published by Politico’s Publishing, is an excellent read.

For a focus on remedies to some of the entrenched problems revealed in the book, and a reform programme for moving from a welfare state to civil society in a New Zealand context, see this Business Roundtable report by David Green.